The Nature and Purpose of Auditing

An audit is an independent examination of companies financial statements by an auditor. He then gives his opinion on whether the financial statements give a true and fair view in an audit report. b. Definition by the Hong Kong Institute of Certified Public Accountants (HKICPA): the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared , in all material respects, in accordance with an identified financial reporting framework. 2. Objectives of auditing a. Primary objective : to provide the readers, including the shareholders and creditors, the confidence that the financial statements are true and fair b. Subsidiary objective • to detect errors and fraud in the accounting records and/or financial statements • to give advice on the clients’ internal control system. External or Statutory Audit

• Examination of the truth and fairness of financial statements by independent auditors. Hong Kong Companies Ordinance requires the financial statements of limited companies to be audited each year. . Internal or Operational Audit • evaluate companies internal control system • conducted by employees, the internal auditors 3. Compliance Audit • determine whether specific procedures or rules are followed • usually conducted by government auditors.  Auditing commenced in England in the beginning of the twelfth century. The persons who made examinations of manors became known as the auditor. The term “auditor” was derived from the Latin word “audire”, meaning to hear. Following the Renaissance in Italy, the principles of double entries were developed. The practice of auditing did not become popular, however, until the industrial revolution. It was because large companies appeared. • The auditing profession became important in England. The audit of all limited companies became compulsory with the Companies Amendment Act 1900. • The Institute of Hong Kong Certified Public Accountants (HKICPA) is the only statutory body responsible for regulating the accounting and auditing profession in Hong Kong.

Competence: Auditors are trained to be a Certified Public Accountant , CPA (Practising). They should have professional knowledge. b. Independence: Auditors should be unbiased in their audits. There should not be any conflict of interest between auditors and clients. Independence could be maintained.  Clients nominate and appoint auditors b. Auditors plan the time and staff allocation for audits c. Auditors evaluate internal control systems d. Auditors conduct tests of accounting transactions and balances f. Auditors complete the audit and issue audit reports